Economy

Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.

March 29 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner said some financial institutions will need substantial government aid, while warning against any attempt to tax investors who join a federal program to buy tainted assets from banks.

"Some banks are going to need some large amounts of assistance," Geithner said today on the ABC News program "This Week." The terms of a $500 billion public-private program to aid banks "cannot change" for investors or they'll lose confidence in the plan, he said on NBC's "Meet the Press."

The Obama administration is pursuing the most costly rescue of the U.S. financial system in history while facing taxpayer concerns the aid is bailing out Wall Street firms that took excessive risks. After allocating about 80 percent of $700 billion in aid approved by Congress, administration officials want to keep open the option of seeking more.

Geithner said the Treasury has about $135 billion left in a financial-stability fund while declining to say whether he will request additional money.

"If we get to that point, we'll go to the Congress and make the strongest case possible and help them understand why this will be cheaper over the long run to move aggressively," he told ABC News.

Wolfgang Munchau often has a dour outlook, but his Financial Times comment today, "A new plan needed as the cycle grows vicious" is gloomy even by his standards.

Munchau argues that the heroic seeming measures to aid the banks are insufficient to compensate for the losses they are and will continue to suffer, and that as they understandably rein in lending, it will make the contraction more severe, worsening credit losses and deepening the cycle. Meredith Whitney has been making similar comments, but with a tad less urgency than Munchau.

While I agree with his concern, that a contraction can slip into a vicious circle, focusing on recapitalization as the primary policy response is wrongheaded. The Swedish in their salvage operation not only took over dud banks and hived off the bad assets, but they restuctured those loans and sin some cases even extended more credit to borrowers. And bailouts to banks without banking reform is a bad idea (and I see the Geithner talk of new measures as window dressing to appease the public in the hopes of eliciting support for the inevitable next round of rescues).

The only way out of a financial crisis is default, whether overt, through writeoffs and resturcturings, or covert, through inflation. This process isn't even seriously underway until we see a lot more renegotiation.

It would be better if we were wrong, but we are of the school that putting the big automakers into bankruptcy, despite its attractions (being able to restructure debt and dealer networks; the UAW contracts are far less significant economically than the media makes them out to be) misses out on one crucial element: you don't have a business if you don't have customers. And a GM bankruptcy would be a protracted affair. Even if consumers believe the company will make it, what about their local dealer? If they worry they might have to schlepp to get their car serviced, is it worth it?

There was was no word from the government or others with knowledge of the situation on the timing of Wagoner's departure or who would replace him. Fritz Henderson, GM's chief operating officer, is the No. 2 executive at the automaker and widely considered to the leading internal candidate as Wagoner's successor.

I knew something was up the second I heard the bank CEO's claim to be profitable. Here it is... We already knew that AIG funneled bailout money to the likes of Goldman Sachs, but according to this trader, it was all the banks and it's been going on for awhile; long enough that the claimed January and February "profits" came from the taxpayer via AIG. Please keep the source in mind, this is via a blogger and his source, not the mainstream media. In other words, it's probably closer to the truth! Sunday, March 29, 2009 Exclusive: AIG Was Responsible For The Banks' January & February Profitability Posted by Tyler Durden at 6:35 PM Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good. I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety: "AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies). (More)

March 29 (Bloomberg) -- The Spanish government said it will provide as much as 9 billion euros ($12 billion) to Caja Castilla-La Mancha to shore up the regional lender's finances and protect depositors in the first bank rescue since 1993. The Bank of Spain said it appointed administrators to run the savings bank after removing Caja Castilla's management. As part of the rescue the government pledged to guarantee as much as 9 billion euros of the lender's liabilities. "The Spanish financial system is still very solid, but nobody is immune to a difficult economic situation that could drag on," said Finance Minister Pedro Solbes after the government met in Madrid to approve the takeover.

SEC. 3. DIRECTIVES TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.

18 (a) IN GENERAL.—Before the end of the 90-day period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve Systemshall make the value of the U.S. dollar equal to the marketvalue of 0.002 of a troy ounce of gold and maintain thevalue of the United States dollar at this level.

SEC. 3. DIRECTIVES TO THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM.

18 (a) IN GENERAL.—Before the end of the 90-day period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve Systemshall make the value of the U.S. dollar equal to the marketvalue of 0.002 of a troy ounce of gold and maintain thevalue of the United States dollar at this level.

Not that I pretend to be a lawmaker, but that seems like a pretty good bill! Of course, I agree, it will not happen, at least not yet...

18 (a) IN GENERAL.—Before the end of the 90-day period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve Systemshall make the value of the U.S. dollar equal to the marketvalue of 0.002 of a troy ounce of gold and maintain thevalue of the United States dollar at this level.

Question: How does one "maintain the value of the dollar" at $500/ounce ($1/.002) when the value has already slid to roughly 1/2 that amount?

18 (a) IN GENERAL.—Before the end of the 90-day period beginning on the date of the enactment of this Act, the Board of Governors of the Federal Reserve Systemshall make the value of the U.S. dollar equal to the marketvalue of 0.002 of a troy ounce of gold and maintain thevalue of the United States dollar at this level.

Question: How does one "maintain the value of the dollar" at $500/ounce ($1/.002) when the value has already slid to roughly 1/2 that amount?

According to the paragraph b, they will have to short the gold a lot

(b) TARGET.—In regulating the value of the United
States dollar, the Board of Governors of the Federal Reserve System shall—
(1) conduct open market operations against an
explicit target for the price of gold on the exchange
operated by the Commodities Exchange, Inc.
(COMEX) of the New York Mercantile Exchange,
Inc.; and
(2) shall not conduct open market operations
indirectly, as in the current practice of targeting the
Federal Funds rate.

I don't know much about US government agencies, but this "US Government Printing Office" is an official source, isn't it? At the first glance, I thought that I am reading some "conspiracy theory" document, but hey, there is a digital signature... What will be next - the Amero transition plan?

And now seriously, does anybody have a clue what this $500 USD/1 oz target means?

Financier sees oil shock from credit crunch

Thu Mar 26, 2009 8:56am EDT

By Christopher Johnson

LONDON (Reuters) - The global financial crisis and collapse in the
oil market have stalled vital investment in oil exploration and
production and are likely soon to lead to a sharp spike in prices, an
energy consultant and financier says.

Matt Simmons, founder of Houston-based investment bank Simmons &
Co, argues the underlying rate of decline of the world's aging
oilfields is as much as 20 percent a year and only high levels of
investment can reduce that to single digits.

With credit tight and oil prices almost $100 a barrel below their
highs last year, oil companies are unable to sustain previous levels of
spending and the result is falling production, he said in an interview
on Thursday.

"We are three, six, maybe nine months away from a price shock. We
are not talking about three to five years away -- it will be much
sooner," Simmons told Reuters in London.

"These prices now are dangerously low. The lower prices fall, the
less oil will be produced and the greater the chance of an oil spike,"
he said.

Oil prices hit record highs of almost $150 per barrel last July but
have tumbled since then as the global economic downturn has cut energy
consumption by consumers and companies alike.

Prices have rallied from lows below $35 a barrel in December to
above $50 but remain well below what many oil companies and producing
countries say they need to invest in new production.

Simmons is a proponent of the "peak oil" theory, and has argued for
years that world oil output is in irreversible decline because oil
industry infrastructure is getting too old.

He says the cost of rebuilding the oil industry is colossal --
"closer to $100 trillion than $50 trillion" over decades: "The
industry's asset base is beyond it's original design life."

THE MARGINAL PRODUCTIVITY OF DEBT Why Obama’s Stimulus Package Is Doomed to Failureby Antal E. Fekete,
Professor of Money and Banking
San Francisco School of EconomicsMarch 30, 2009

Fekete doesn't make any sense in this part of his argument (bold and underline are mine):

Note also the crescendo of the dumping of equities and the desperate
attempt to redeem toxic assets by private parties, sending the demand
for cash sky high. The dollar, at least the Federal Reserve note
variety of it, will be increasingly scarce. Rather than falling through
the floor as under the hyper-inflationary scenario, the purchasing
power of the dollar will soar. You say that Ben Bernanke and his
printing presses will take care of that? Well, just consider this. The
market will separate vintage Federal Reserve notes from the new issues
with Bernanke’s signature on them. In a classic application of
Gresham’s Law people will hoard the first, bestowing a premium on it
relative to the second variety, which will fall by the wayside.

If you look at any U.S. currency, it is signed by the "Treasurer of the United States" and "Secretary of the Treasury". Bernanke is head of the Federal Reserve and his signature would not appear on any Federal Reserve notes. This kind of mistake tends to weaken the rest of Fekete's article. After all, if he can't get something this simple correct, how can I believe any of his other comments?

Simmons goes way beyond what is posted in the article. In a recent interview (I think it's one of those on Financial Sense) he said that he thought $140 oil was cheap. He said $4-500/bl would be about right. He also said that building more efficient cars isn't an answer, traveling less is part of the answer, probably a lot less.

If you have the time this is from 1996. This guy was pushed aside by the establishment as a nutter. Indeed he had a breakdown. Really worthwhile listening to, especially if you are a conspiracy theorist.

Think about it. Who seriously expects to see commodities -- from gold to cotton to oil -- priced in anything but greenbacks anytime soon? There have been times when Russia, Iran and Venezuela considered pricing crude in euros, but that idea evaporated for one simple reason: depreciating the dollar ends up harming those countries that hold them in reserve.

Quote:

So far, no one has come with a good idea for an alternative to the dollar. China and Russia propose expanding the use of the International Monetary Fund’s Special Drawing Rights, a cumbersome vehicle whose value is set by a basket of currencies. Russia has added the idea of putting gold in the basket as a stabilizing element.

Quote:

The IMF? Is that really the institution we want to manage complex international monetary politics? Critics have already questioned how the IMF would go about setting the value of the SDRs, and how it would resist political pressure to change the valuation.